How to take advantage of the current mergers and acquisitions environment

Patricia A. Gajda, Partner, Brouse McDowell

If your company is considering a merger or acquisition, you may want to consider striking while the iron is hot.

“The current state of the economy has resulted in what is commonly viewed as a ‘buyer’s market’ in M&A,” says Patricia A. Gajda, partner and chair of the Business and Corporate practice group at Brouse McDowell in Cleveland. “This is driving some to enter the acquisition market, before the buyer’s market ends.”

Smart Business spoke with Gajda about the current state of M&A activity and how to take advantage of the situation.

How is the current market impacting the M&A environment?

We have seen an upswing in M&A activity over the past year. This is due to several factors, including a loosening of the credit markets enabling financing, the availability of private equity funds and companies flush with cash. Strategic buyers are out looking for businesses that were hurt by the economic downturn and investment buyers are looking for good investments.

Strategic buyers are focusing on transactions that result in expansion in markets and cost saving synergies from an acquisition. Additionally, because it is a buyer’s market there are good deals and bargains to be found. Companies have cash and the ability to buy after staying out of the market for the past few years. The private equity funds are actively out in certain market segments looking for good fits for their interests and are sitting on large funds of money for investment.

There is definitely an interest in ‘green’ businesses, as well as specialty manufacturing, health care and technology. Other drivers of corporate transactions include specialty services, desirable personnel, a certain technology, know-how or process. Even if a company is not for sale, the company may still be looking to divest subsidiaries, certain assets, divisions or operations.

From a global perspective, I see an increased interest in picking up businesses with a global reach, but the uncertainty in the Euro Zone and China have caused some issues in that regard. There is an uncertainty as to how the overseas economic issues will affect the United States, and this has caused some hesitancies.

How is this affecting the way transactions are structured?

Each transaction is unique and the terms and structure need to be determined for that transaction. Both the buyer and seller must be clear on their criteria for the transaction.  What is the buyer looking to achieve from the transaction? What is the seller trying to gain from the transaction? These questions need to be answered.

At the beginning of the downturn, a number of deals went on hold and took a wait-and-see-approach. Now that there is increased activity, both parties — buyers and sellers — are interested in moving quickly on possible transactions. With the uncertainty in the business climate it is undesirable for potential deals to drag out, if they can be closed quickly.

Sellers want to close and walk away without any further risk to purchase price through any delayed payment mechanism. Buyers on the other hand are able to structure payment on favorable terms including deferred payments. Deferred compensation structures can be used to lessen any valuation gaps, and take away some of the uncertainty to close with less closing conditions. A buyer can use mechanisms such as earn-outs to keep the former owner interested in the business and the transition of the customers and employees. So, I think that one impact of the economy of the past few years is that parties on both sides of transactions have become more focused, results driven and just smarter about their strategic deal making.

What other trends or risks should business owners be aware of?

While most companies will state a preference for organic growth, the current favorable pricing and shorter timelines to reach the desired business plan make acquisitions more favorable. Alternatively, sellers are under pressure to divest non-core businesses or under-performing operations in order to improve the company’s over-all financial performance.

With the uncertainty in the economy at this time, business owners seeking to sell should focus on the strength of the potential buyer and the ability of the buyer to close the transaction. Additionally, a cash purchase price at closing is of course the least risky route to receive full value for the company. Any type of future payment such as through promissory notes, earn outs, or stock grants with the current volatility in the markets and the economy are risky.

A buyer has to fully understand the risks, and avoid the temptation of pursuing a transaction, despite discovered risks and doubts. From the standpoint of a business owner seeking to buy entities, due diligence of the target company is critical. A buyer needs to fully understand what it is buying, and wants to avoid surprises. Additionally, from a buyer’s standpoint the market being a buyer’s market allows for the purchase price to be structured as a mix of cash, equity and debt.

How should they approach things differently?

Companies that have the right resources are relying more on internal support for transactions. But companies should be cautious and make sure they are staffing the transaction with experienced and skilled personnel to achieve the desired outcome in a timely and thoughtful way. Those closest to the particular market should be used in the diligence of the business.

Buyers need to focus on valuation of the target and integration of the businesses and should devote the proper resources and engage the best available third parties to help in those processes.

Patricia A. Gajda is a partner and chair of the Business, Corporate and Securities practice group with Brouse McDowell in Cleveland. She can be reached at (216) 830-6830 or [email protected]